Good day and welcome to today's AAON, Inc. first quarter conference call. As a reminder, today's call is being recorded. At this time, I would like to turn the call over to your host, Norm Asbjornson. Please go ahead sir.

Norm Asbjornson

Good afternoon. Prior to embarking, I would like to read a forward-looking disclaimer. To the extent any statement presented herein deals with information that is not historical, including the outlook for the remainder of the year, such statement is necessarily forward-looking and made pursuant to the Safe Harbor provisions of the Securities Litigation Reform Act of 1995. As such, it is subject to the occurrence of many events outside AAON's control that could cause AAON's results to differ materially from those anticipated. Please see the risk factors contained in our most recent SEC filings, including the annual report on Form 10-K and the quarterly report on Form 10-Q.

Thank you. I would like to introduce Kathy Sheffield, our CFO.

Kathy Sheffield

Good afternoon. Welcome to our conference call. I'd like to begin by discussing the results of the three months that just ended March 31 and those results of which we are quite proud. Revenues were up 11.8% to $65.5 million from $58.6 million. This increase was primarily due to an increase in both market share and pricing. Gross margin stayed constant for the two years at $15.7 million. The gross margin percentage was 23.9% of sales for the first quarter in '08 compared to 26.8% of sales for the same quarter in '07. Although the margin percentage was less this quarter compared to the same quarter a year ago, it was still a very good margin and the margin being at 23.9% is really a better respectable representation of what we would expect our margins to be.

Selling, general, and administrative expenses increased for the first quarter by 3.5% to $5.9 million or 9% of sales from $5.7 million or 9.8% of sales. The increase in SG&A is primarily due to an increase in sales related expenses and then just overall general and administrative expense increases.

Operating income decreased slightly by 2% to $9.8 million or 14.9% of sales from $10 million or 17% of sales. Net income increased by 1.6% to $6.4 million or 9.8% of sales from $6.3 million or 10.8% of sales for the same period last year.

Diluted earnings per share was $0.35 per share this quarter compared to $0.33 per share the same quarter a year ago. EPS was based on 18,311,000 shares compared to 18,902,000 shares for the same quarter in 2007.

Moving to the balance sheet, our current asset ratio increased slightly to approximately 2.3%, primarily due to an increase in current assets. Capital expenditures for the quarter were right at $1 million and those expenditures were related to equipment purchases which would increase our production efficiencies.

Shareholders' equity per share as of March 31 was $5.58 compared to $5.29 last year. During the first quarter in 2008, we paid cash dividends of $2.9 million and also bought back stock from retirement incentive plans and through the open market as well, and paid $1.8 million in total.

I would now like to turn the call back over to Norm, who will discuss our results in further detail, along with discussion about new products and the outlook for the remainder of the year. Norm?

Norm Asbjornson

Yes, we had record-breaking sales performance, primarily due to having come into the year with a larger backlog than we did in 2007. We had a negative order input in that we did not book quite as much as we did in 2007. Therefore, we pretty much stayed constant with our manpowering. Then coming into the second quarter now, into April this year, there's been an indication that the order is on the upswing. It has been very strong bookings and as a matter of fact, weakness in the first quarter in bookings was in the first two months – January and February, and we had a strong March, stronger than it was a year ago. So it looks like we're gaining strength in the booking department at the present time.

Our second quarter actual shipments is pretty well covered with orders which we presently have in the backlog. We still have a little opening for new orders and that is rapidly being taken up. So our problem in the second quarter is not going to be orders. Our challenge is in producing product. In that respect, we sit with kind of the proverbial good and bad situation. The good part of it is that we've got plenty of work to put out the door. The bad part is we're having a difficult time hiring additional personnel, so we're going to be somewhat limited by personnel and that's due to unemployment rate in our metropolitan area of 3.2%. It doesn't give you very many people to pick from. So, our second quarter results on shipment are not going to be limited by orders, they are going to be limited by our ability to get out the door.

As I spoke earlier, order input looks very good. Based upon all the signs and everything we see, it looks like a very promising year. However, I also read the paper and listen to news broadcasts and everything and there are, as we all know, several negative things out there in the marketplace and there's a lot of negative discussion. But, I did see some signs of that there in the first two months of this year. But, since that point in time, it doesn't look like it's happening in the construction market, at least for us. So that's kind of the going on situation in that respect.

Now, on gross margins, we are seeing a more inflationary environment than we were seeing last year and that is reflected in the results that we obtained for the first quarter. We are at the present time going to have another price increase which is occurring at the end of this month. So that will help us. On what we've got in the backlog right now, basically we had a price increase on December 1 of last year and that didn't get worked through our backlog until the very last part of the last month of last quarter. So what happened last quarter was that the cost increases for material did come through and the price increases weren't effective. The price increase will be effective obviously in most everything for this quarter and the question mark is, are material costs going to continue to increase faster than our cost increases are going to improve. But, time will tell on that, but it is an inflationary environment which we're in.

SG&A expenses, as was noted by Kathy, are up in total, but they are down as a percent of sales. They are down from 9.8% to 9% even though they are up in total dollar volume. I expect 9% to be a reasonable estimate for the rest of the year on SG&A.

The operating margins at 14 .9% are extremely good for this industry and very happy with it. That's better than our margin of last year 13.6%. This is our best performance in the past four years on operating margin. So that portion of it looks very strong. Of course, it comes around to the net income line which was a record that we had this year.

The CapEx, as Kathy noted, we've only spent $1 million so far for basically equipment and we've been giving guidance that we will be spending $7 million to $10 million. That still is an accurate number to be contemplating. We are embarking upon some rework in addition to the building which will use most of that (inaudible). The work is going to be done on the Tulsa facility and that will consume the majority of the balance of that $7 million to $10 million.

We believe we have adequate equipment to get ourselves, not only through this year, but through next year with a reasonable amount of growth in it too and what we're setting up in the way of what we're doing on the building portion is not so much what we need this year, it is not, it is for future years. What it will do for us, however, is as we get the building done, it will improve our ability to run some portions of our building – our production a little more efficiently than we would have without this. It will relieve a little tightness we have on a couple production lines. It will provide us what we need for several years in the future in building capacity, so our capital needs in that area will disappear for some time to come and the machinery side of it, we're quite good in, so the company is sitting in extremely good condition and getting better as far as what capital needs we have in the company for substantial growth.

Canada has, as you know, had problems ever since we bought it out of bankruptcy. We haven't been making money up there. It continues to be the case. In the first quarter this year, we just still had a very minor loss compared to previous months and previous years and quarters, and we are sitting at a real unpredictable situation because those of you who follow the exchange rate between the Canadian dollar and the U.S. dollar know that we had to implement nearly a 30% price increase on any of the Canadian product which was sold into the United States due to the change in the exchange rate with the Canadian dollar becoming much stronger compared to the U.S. dollar. That, of course, was a hard price increase to sell through to our U.S. customers and it diminished our order input very severely and we have been working off backlog on that operation and the big catch now is because about 80% of our business has historically come out of the U.S. customers for the Canadian operation, is our ability to get orders to maintain that.

Our present backlog and our present pricing of our backlog is certainly adequate to make profit. Our problem is when more in getting the personnel trained and working properly, and in getting more orders for the facility. We are, as noted, because of the precariousness of the profitability of that portion of our company, still analyzing its future very significantly.

On new products, the air handlers and chillers, which are to varying degrees new products with us are coming on strongly and the addition that we are putting on to the Tulsa facility has a lot to do with the air handler and chiller portion of our business because that is one of the areas that we're squeezed on for space. We have gotten into, after several years of telling you we're heading into it, we have basically gotten into the residential on a very minimal scale and have anticipations that we will be working out the problems of actually making it functional as a marketing system over this year.

We are entering one new area of product. There is a system which is many times referred to as a floor by floor unit or a self-contained variable volume system. It's the type of system which is prevalent in New York City for the high-rise market and in other cities for high-rise market. It is a very dominant product line for the New York City market, a little less dominant in some of the other high-rise markets. So it has fairly good volume capabilities depending largely upon high-rise office buildings, of course, for the market.

We have another thing which is being introduced and has been introduced by us and by our compressor supplier called a digital scroll compressor which effectively makes small tonnage compressors variable capacity devices. And this has a huge opportunity for a number of reasons, among which is its ability to save energy. It's a very energy-efficient way of improving production. Many of you may be aware of some of our common terminology in our industry called SEERs, in other words Seasonal Energy Efficiency Ratio or plain EER for larger equipment which is just Energy Efficiency Ratio. That number is one which is at a fixed point, one point of measurement. It doesn't cover the full spectrum of the varying loads that occur due to the varying temperatures and varying internal loads of a building. And so it's a good measurement of the overall capability of a machine to save energy, but it is a very poor measure of its ability to totally do that.

What I'm trying to say there is, if you were running it always at that one design point and comparing it, it's a great measure. But that's not the real world. The real world is that it's always varying, your load is, and this digital compressor has a very, very pronounced positive effect upon doing that. It's a new technology. We are in a leadership position of implementing that technology and it we think will be a very pronounced effect upon our ability to compete and also to address the energy issue that we're so involved in, in our industry.

Looking at the various kinds of business segments that we involve ourselves in, let's talk about some of the ones that we're into. Probably the strongest one we're into is our education, and that's largely first grade through 12th grade building structures. That market is quite strong, doing very well. We are doing very well in it and it's doing well for us.

Our next strong one has been and at one time was our primary one, the retail market. The retail market is a little bit on the weak side at the present time and has, in fact, some people are cutting back, others are not, but it's not a real strong part of the market. So in one respect, we're fortunate that we've redirected our efforts over the past few years more into the educational structure, which is a stronger market at the present time. The other part that has still shown some strength compared to some previous years and was one that was pretty weak for a long time is the office building market. That's not doing badly. And the other part of that which also was having problems in the past and seems to be somewhat stronger now is the manufacturing buildings market.

The medical and healthcare portion of the market which is a smaller market but is a very healthy market at this time, as one would expect as our population ages and grows, that market is likewise growing. And then there's our general unqualified type of building which is not covered by one of the aboves and that portion of the business looks pretty strong. So as I mentioned before, if I didn't read the newspaper, didn't listen to the newspaper, I'd think business is quite good.

The outlook for the balance of 2008, therefore, is questionable, because there is other news out there that would lead to you believe that you should be concerned. But, what I'm seeing on the order desk and what I see in the immediate future would tell me that it's going to be strong at least for awhile.

We have been active in our stock repurchase program. The new program, which began in November of '07 and blacked out most of the time because of the end of the year, will be reentered by us this Friday. The remaining shares we have yet to purchase on that is 1,028,900 shares. As Kathy noted earlier, we have already purchased some this past quarter and we purchased quite a few in the fourth quarter. Basically, we purchased almost 800,000 of our initial authorization out of that.

Afternoon, Norm, and congratulations on a very good quarter. Could you quantify a little bit as to what the loss in Canada was, and also could you quantify your backlog?

Norm Asbjornson

Total backlog for the company is right at $50 million. The loss in Canada was about $62,000 in the quarter.

Frank Magdlen – The Robins Group

And what were the revenues in Canada?

Norm Asbjornson

Canadian revenues, one moment here.

Frank Magdlen – The Robins Group

Maybe Kathy could look up for us the shares that were actually repurchased in the quarter.

Norm Asbjornson

Surely. Kathy, would you do that? The Canadian sales for the year, $2,821,000.

Frank Magdlen – The Robins Group

All right. Since you've added so much to your plant and equipment in the last few years, what would be a good maintenance CapEx number to look at going forward?

Norm Asbjornson

Depends upon our growth, Frank. What we are embarked upon right now in the building program is we've spent the past two years trying to analyze how we should build this building out and what effect it would have on our abilities and various things – and by our abilities, I'm saying our efficiencies – what effect it would have on our efficiencies, so we know how it would affect our P&L statement and everything. We have done quite a lot of work in that area and we've decided that this is an appropriate time to move forward. And the reason we're moving forward with it right now is twofold: We were first of all going to move forward with what plan A and then our tenant, who has been renting from us, told us that they were shutting down a plant here and wouldn't need our place for distribution center, so we were going to get back the building that we have rented out and that changed our approach to the whole thing and made it such that when we analyzed how to do all this with that in mind, we decided to go forward and basically set this thing up for a portion of the building anyways and be set up to go to what we think the ultimate capacity in today's dollars would be of approximately $900 million to $1 billion out of this facility in Tulsa. So a portion of that building that would be necessary to do that will be completed by the end of this year.

Frank Magdlen – The Robins Group

All right. But, Norm, on a regular reoccurring basis, you'd need to replace so much plant and equipment. What is that now?

Norm Asbjornson

Basically we're running between $9 million and $10 million on depreciation and that's probably a reasonable number to use for that purpose. The only deviation from that will be if the business grows faster or slower than what we anticipate. Either way, it will affect that number.

Frank Magdlen – The Robins Group

All right. And then Kathy, do you have the shares repurchased?

Kathy Sheffield

Yes. For the first quarter, Frank, we purchased 103,040 shares and that was at a total price of $1.8 million or an average price of $17.72.

Frank Magdlen – The Robins Group

All right. Thank you very much.

Kathy Sheffield

You're welcome.

Frank Magdlen – The Robins Group

Norm, can you give us a little bit of history on price increases, say over the last two years? And I know you said you have one coming out at the end of this month – but in just general terms.

Norm Asbjornson

In general terms, we've been increasing price over the past two years probably somewhere in the high single-digits. In other words, 8% or 9% a year, even though the inflation would tell you that that's too high. It is not for the cost we incurred because we're tied more strongly to the commodity industry index – steel, copper and iron or aluminum which has been going up faster. Let's just talk about that for a moment.

Copper during 2007 ranged in price from $2.42 a pound to $3.65 a pound. In the first quarter of 2008, it has ranged from $3.80 to $3.90 per pound. We're locked in on about 80% of our copper for 2008 ranging in prices from $3.55 to $3.60. We estimate that second quarter copper is going to see copper at $4.30 to $4.50 a pound. So we're going to be benefiting by our lock-in of 80% of it, but 20% of it we are going to be paying that kind of price for.

Looking at our steel, prices were pretty level at about $0.45 a pound for the first ten months of 2007, and then it increased in November and December up to about $0.50 to $0.51 a pound. Ever since then, it has been going up month by month. We're up now running in the upper $0.50s and the lower $0.60s a pound. Just, in other words, coming up from say November at $0.45, now we're playing with $0.60 a pound. So where's that going? I don't know. That's a pretty big number. And those two elements, of course, make up a lot of what we buy to fabricate with and they make up a lot of the material that our vendors' componentry use.

So we're in kind of a higher inflationary environment than what the country as a whole is experiencing. Aluminum is one of the beneficial ones in that it's experienced about a 4% increase. So it's not running wild. Stainless steel is running at $2.45, $2.48 a pound. We think it's going to be pretty stable there. Component prices, as I said, are connected very tightly to those first two. And so, we expect them to run somewhere in the 5% to 7%.

Frank Magdlen – The Robins Group

All right. Well, thank you very much. I'll jump in back in queue, Norm. Again, thanks for the good quarter.

Norm Asbjornson

Thank you.

Operator

We'll go next with Joe Mondello with Sidoti & Company.

Joe Mondello – Sidoti & Co.

Good afternoon, Norm.

Norm Asbjornson

Hi, Joe, how are you?

Joe Mondello – Sidoti & Co.

Good. First can you – I know you mentioned the end markets there. Could you maybe quantify or just give a rough estimate or just some color on how much exposure maybe to education and to the rest of the markets there?

Norm Asbjornson

I don't have some really good numbers to give you, so they're going to be seat of the pants sort of numbers at this moment in time. I'm going to say that the education market is probably running 25% of our business or maybe 30%. Retail probably is in the low 20s. Office buildings, 15%, 18%, and the rest of them would probably break down to balance of that, 30% or whatever.

Joe Mondello – Sidoti & Co.

All right, that's fine. Thank you. And then on to the steel, how often are you buying steel and what's your procedure there in keeping inventory of steel?

Norm Asbjornson

Well, my procedure right now is over inventory, because of the price – constant price upswing we've got, and I have various places within the company here where we can store steel. Some of it is stored in the flat, in the (inaudible) machines we have what we call warehouses that we store steel in preparatory to using it. And we have in that area somewhere in the 600,000 pounds of capabilities, all of those things being filled, and we try and maintain a full situation on that. And we probably have in rolled up unprocessed steel, we have the capability of carrying probably 800,000 pounds of steel and I'm trying to keep that all filled and beyond that we try and make commitments to our steel suppliers for as far as they would commit to us at a price that we think is worth committing to and we're doing that. And so steel is not a hedge-able item, and therefore we're doing everything we know to hedge it.

Joe Mondello – Sidoti & Co.

Would you say you have like somewhat of a schedule on how often you're buying it, like every two months, every three months?

Norm Asbjornson

We bought it every time, every day that we get a good chance, because we're going to use 30-some million pounds, and at that volume, we are getting many truckloads. A truckload is somewhere between the high 30,000 to 50,000 pounds, and we have several of them come in every day. So we're constantly buying and shopping for steel.

Joe Mondello – Sidoti & Co.

Great, okay. And regarding your gross profit margins, with this dramatic increase and it doesn't look like it's dropping any time soon, what do you think your – could you give some color on what your gross margins and what you expect them to be like and if you can hold them at all and such going forward into 2008?

Norm Asbjornson

Well, as Kathy mentioned to you, we ran 23.9 in the first quarter, down from a year ago 26. The 26, if you will recall back then, I told you that kind of was where all the stars align themselves, one of the few times in my life when they did, but they did last year. So, the number we have this year is a very good number. Last year was kind of an abnormality. The ability for us to keep that there is going to depend upon our ability to guess where this price increase of commodities and things is going, as well as our ability to pass on the price increase to the users. It's always difficult to convince people they should pay more money than they have been, and their expectations are somewhat based upon their own experiences with our economy as a whole. Of course, right at this moment in time, there's getting to be quite a bit of expectation for inflation in food and in energy use, particularly at the gas pump. So it's being easier for them to understand our needs to pass it through and we're able to pass through our price increases. We always do have that lag effect, however, of our backlog being priced at one price and end up being built at a new cost. So, to answer your question directly, I think we can hold it up in the 20s, somewhere around where we are right now.

Joe Mondello – Sidoti & Co.

How much of the 2% to 3% decline from last quarter would you say is due to increased raw material prices in this first quarter?

Norm Asbjornson

The vast majority.

Joe Mondello – Sidoti & Co.

Vast majority, okay. And then just one more thing, in terms of the replacement market, can we look at – is it valid to look at it as if the U.S. economy begins to turn? The replacement market, is that going to increase as well just because companies are going to have more capital spending, is that a good way to look at that?

Norm Asbjornson

Yes, I think it is. And then you have to think about what precipitates various types of sales, and new construction is an easy one for our industry to run at, whether you're in the engineering business, in the contracting business, or whatever segment of it. It's a little harder to run after the replacement market, but when the new market – if the new market is not available, these people have to find something to run after, and therefore, they put more pressure on selling into the replacement market and it tends to grow if the economy isn't real sick. Going out and talking to someone who kind of knows they need to replace their equipment and if somebody is in there doing a good selling job on them, it's more likely to result in an order, and therefore the replacement market seems to get healthier when the other market gets a little sicker.

Joe Mondello – Sidoti & Co.

All right, thanks a lot.

Operator

And we'll go with Jon Braatz with Kansas City Capital.

Jon Braatz – Kansas City Capital

Good afternoon, Norm and Kathy.

Norm Asbjornson

Hi, Jon, how are you?

Jon Braatz – Kansas City Capital

Pretty good. Couple of questions, you mentioned, Norm, what your revenues from Canada were this quarter. What was it last year in the loss?

Norm Asbjornson

I've got it right here, Kathy. Sales last year in the quarter were 1,922,000. So it's up quite a bit from the last year, because as we mentioned to you or we did in previous quarters, we had quite an influx of orders last year which turned out to be a very detrimental thing to have happened because a large quantity of them are in the United States and we got caught in that exchange rate problem. We had all these orders in house at one price and we ended up, when we collected the money in U.S. dollars and converting it to Canadian dollars, taking a real bash on it.

Jon Braatz – Kansas City Capital

Right. But I think you had said in earlier calls that you thought the revenues would be down sharply this year.

Norm Asbjornson

They are from here on out. We've gone through the backlog. Now we're more dependent upon new orders.

Jon Braatz – Kansas City Capital

Okay, good. Did you mention – I was distracted for a second here, did you mention what the price increase was going to be for the end of this month?

Norm Asbjornson

Roughly 3%.

Jon Braatz – Kansas City Capital

3%, okay. All right, fine. And that's across the board?

Norm Asbjornson

Yes, across the board.

Jon Braatz – Kansas City Capital

Okay. Let's see, what else do I have? I think that was it for now. If I have anything else, I'll get back in the queue.

Norm Asbjornson

Good talking with you.

Operator

We'll go next to Graeme Rein with Bares Capital.

Graeme Rein – Bares Capital

Hi, Norm.

Norm Asbjornson

Hi, how are you?

Graeme Rein – Bares Capital

Doing well. Could you talk about two things for me, one, national accounts, have you made any progress in getting into any of the large national accounts? And then also the 410-A refrigerant, are you seeing a change in the market in terms of acceptance and demand for that aspect of the product yet?

Norm Asbjornson

Okay. We haven't pursued the national accounts too aggressively for a couple of reasons, one of which is we've been very busy with the other direction that we've been in pursuit, which was expanding our customer base. And the second one being that in times of volatility of commodity prices, it's really hard and very risky to go making long-term commitments, which is what you do with national accounts. You make long-term financial commitments and if commodities are volatile, you are really rolling the dice a lot more risky than you are on the short term order by order basis. So, we've been very busy on the other front, and we've not been giving out as competitive bids when we have a chance on the national account as some of our competitors have been willing to do.

Graeme Rein – Bares Capital

Okay. And then, the 410-A?

Norm Asbjornson

The 410-A is rapidly in process of changing and it's one of those areas which is, from my perspective, not understandable about why anybody would buy the old style refrigerant, because you're buying a piece of equipment which minimally in the worst case condition is going to be have a ten-year life, and in most cases, it is going to have a 20 some year life, a 30 year life. And on January 1 of next year – not next year, the year after, 2010, there will no longer be – you will no longer legally be able to sell an R-22 machine in the United States, and the amount of refrigerant that the chemical companies can build in the old R-22 drops dramatically again by federal law. And so, you're selling a product today that is going to have a hard time having refrigerant available for it because it's going to rapidly become dependent upon recycled refrigerant. And at some point, you are going to have to replace the unit probably not because it wears out, but because you can't get the refrigerant at a reasonable price. So it's kind of nonsensical, but there are still a lot of people buying the old equipment, but it's dawning on a lot of them how foolish that is and we're happy to have that happen because, as you know, we've been using – had all of our equipment available at R-410 for several years now. And so, it's beneficial to us when that dawning happens to potential customers because some of our competitors are not nearly as far along as we are in converting.

Graeme Rein – Bares Capital

Okay. That's what I was just going to follow up with, have you seen a change in the competitive offerings?

Norm Asbjornson

They're gradually moving that way. We have heard some people who supply componentry which is refrigerant-type determined, making concerned statements about why the industry isn't moving as fast as they think it should, and they're quite concerned that there's going to be a lot of confusion and a lot of trying to get variances from the government and the whole lot, anything and everything sometime next year about this time, because the chaos that's going to exist where somebody hasn't gotten themselves properly prepared to go 410 is going to be pretty substantial for some of these very large names in our industry, I think.

Doing well, thank you. I have one question. As you think about the education build-out of schools here across the country, are those replacement schools, replacing existing schools, or are those building out in response to the housing growth in the past few years? How do you see the drivers of that piece of your business?

Norm Asbjornson

Well, most of it is due to just population growth. I've been around here a little while. At one time when I was growing up, I remember that the population of the United States was about 160 million, 170 million, 180 million, and now it's somewhere close to 300 million. And to handle that, you're talking 5 million buildings you have in existence in the United States to handle as much we've got right now. And if you project that number on, depending upon which of the projections you wish to believe in, in another 20 years, you may be looking at instead of 300 million, you may be in the 500 million area, or certainly in the 400 million and realize that that's going to – if we've got that many million buildings today, we are going to have lot of millions of buildings to handle that population and that's probably the biggest driver.

But also what happens is, as our cities grow, the internal part of the city at one time was the center of the city and then it moved to the urban areas, and some of the central cities lost a lot of population but the general area of that town or city doesn't decline, it just moves into the suburbs. So there's a lot of movement just within an area that creates new schools for these new areas where the new families with the children are going. And then as is happening in some places, they're coming back into the central city now and they're going back in and renovating some of these old schools and putting air conditioning into them and bringing them up to speed. So there's a whole host of things that at work here that I believe will continue to happen. Particularly, there's some effort to slow down our immigration in the United States, but the number of children per family I think has reversed itself and started growing a little bit. So, it looks to me like we're still in a growth mode in that area.

Corey McCullum – GMP Capital

Okay, thanks. Just one quick housekeeping issue, the tax rate in this quarter versus the first quarter of '07 seems to be a little bit different. How should we think about that going forward?

Kathy Sheffield

Going forward, it is presently at 35%, that's what we expect it to be going forward. There were three things that actually affected the tax rate between this quarter and the quarter a year ago. That had to do with an R&D tax credit and a domestic production activities tax credit and some apportionment factors in various states based upon our new FIN 48 requirement. So all those things said, we're looking at 35% through the end of the year.

Corey McCullum – GMP Capital

Thank you.

Operator

And our next question will come from Robert Marcoin [ph] with Thermometics [ph].

Robert Marcoin – Thermometics

Hi Norm, congratulations on the good quarter.

Norm Asbjornson

Thank you.

Robert Marcoin – Thermometics

I have a question on the new compressors. What sizes are those available in and how soon are you going to integrate them into your equipment?

Norm Asbjornson

Well, the manufacturer of those compressors introduced them to the U.S. market in the mid-1990s and nobody accepted them because they were a little more expensive, and the manufacturer happens to be a worldwide manufacturer and found a ready market for it in the Asian market, put it into production over in their Asian plant and sold it into that market, and when we in the early 2000s were looking for ways to address energy as well as some other problems that needed a variable volume compressor, remembered our foolish statement that we in fact didn't want it back in the mid-90s, and we called them up and said, are you still wanting to sell in the United States?

And we cut a deal with them to bring it in for us in 2002, and it was a very limited offering. It was only available in very small – in the area of where normally you have variable volume compressors in large sizes, but you don't have in small sizes. Those are normally just on or off type compressors. And these were available in limited range in small compressors, in the four to seven ton area, which is typical to, say, a normal size house in most parts of the United States.

And so, we brought that in and we used it as well as we could, but it was as I say a very limited ability to do much with it. And we've been after them to expand the size of the compressor and make it more available in the United States, both of which they have been doing, and also because the Far East market is unencumbered in Asia or in China, India, and Indonesia by the environmental concerns. They are not under any obligation to go to the new refrigerant because the Kyoto and the Montreal protocol did not address that for developing countries.

So they only had it available in the old refrigerant over in the Far East market. And so, the manufacturers had to evolve that compressor into the new 410 market and also expand it. So they've had a considerable challenge doing that but they're doing it very well and we're able now to offer it in much more sizes but always in small sizes so far, and just very recently are we starting to go into larger sizes. So it's a funny thing. We've got a variable volume compressor in small sizes and there are some out there in large sizes and there's a big gulf in between that is not available.

Robert Marcoin – Thermometics

Thank you.

Operator

And we'll go back with Jon Braatz.

Jon Braatz – Kansas City Capital

Norm, I think in your text of your commentary, you mentioned that SG&A costs came at 9% for the first quarter and you thought 9% was sort of the going rate going for the remainder of the year. In just doing some calculations, it would look like if I did that, your SG&A cost for the year would be up about 20%. Did I misunderstand your comment?

Norm Asbjornson

I don't think so. The 20% would sound a little high just doing a quick mental calculation because we've come down from 9.8% to 9%, and then what that would have to – most of that 9% would be directly into our growth. Now, if you're anticipating a 20% growth for us, then you'd be right on the nose, I think.

Jon Braatz – Kansas City Capital

Right.

Norm Asbjornson

It's going to be very closely tied to our growth.

Jon Braatz – Kansas City Capital

Sure. I understand. Okay. And then the second question is, if I came to you and said I'm looking for a piece of your equipment, I need you to bid on it and I'm looking for delivery in January of next year or something like that, given the volatility in the commodity prices, how would you quote me? If you could give sort of a real life walk-through on that, how would you quote me knowing that, you don't know what steel price are going to do, can you walk me through that a little bit?

Norm Asbjornson

Sure can. There's two ways I can approach you. I can give you a firm price and I can do a speculation on my part about what the cost will be. And then if you say, that sounds like it's going to be very high, I could then give you a price which if you took delivery today, and we have evolved and I think it's our own evolution of what we've done, but we've taken the percentage of material that's steel, copper, people, and all those things, and we've written a formula, which is not a very complex formula to take governmental statistics which are available on the Internet for each of those commodities and calculate a price for the thing. In other words, we can take today's price and say, "Okay, we'll sell it to you for today's price adjusted by all these factors which – and here's the formula and you can go on the Internet and you can make the adjustment to the price and you can tell us what we're going to charge you, and we will be happy to sell it to you for that."

Jon Braatz – Kansas City Capital

Okay.

Norm Asbjornson

So, one way is a speculation on our part and the other one is a speculation on your part, and you just take whatever the governmental statistics say each of those commodities have gone up, put it in the formula, crank out the percentage increase to give us and give it to us. We use that when we deal with national accounts, if we can convince them to go that way, and it seems to be that they go that way because they can calculate how much price increase they should give us just like we can and they feel comfortable in that because they're using governmental readily available numbers to do the calculation.

Jon Braatz – Kansas City Capital

What percentage of your backlog or your orders that come in, how would you say that what percent is quoted the first way versus the latter way?

Norm Asbjornson

Well, the only way – the only people really that use it very much are national accounts.

Jon Braatz – Kansas City Capital

Okay.

Norm Asbjornson

Because most people, once they give us an order for a job, it's usually a pretty short-term order. In other words, they want it delivered for the most part within the next two to three months.

Jon Braatz – Kansas City Capital

Okay. Thank you very much.

Norm Asbjornson

You're welcome.

Operator

And we have a follow-up from Joe Mondello.

Joe Mondello – Sidoti & Co.

Hi Norm, I just have one question, it's actually regarding the SG&A there. I just want to clarify. The first quarter of last year was 9.8 and the first quarter this year was 9, but the last three quarters of last year were around 7 to 8. So are you expecting the last three quarters of this year to increase from that 7 to 8 to 9, or to be roughly in line?

Norm Asbjornson

Kathy is more familiar with all of the intricacies of that. I'd rather she'll address that. So I'll turn it to her.

Kathy Sheffield

Yes, Joe, it's going to be more in the 8.5% to 9% in the SG&A is warranty. And as our sales increase, there's – we're going to be reserving a certain percent of warranty that will go into the SG&A and increase it.

Joe Mondello – Sidoti & Co.

Okay, thank you. Thanks guys.

Norm Asbjornson

One of the things that you see for that slowdown in that is our warranty costs tend to peak in the summer during the air conditioning time because the most costly and the most problematic portion of our unit is the cooling portion, not the heating portion. And therefore, as the year goes on, we can kind of gauge if we're not having as many problems as we anticipated because we always have to put an end to this reserve, and if we're not taking it out of the reserve as fast as we thought we were going to, then we have a formula that we've agreed upon with our auditors as to how much reserve we should have and we crank in there, and if it's starting to over-reserve then we start backing it off. And of course, when you back it off, it backs right down to the P&L statement. And so that's why last year, for instance, our warranty costs – there's two warranty things that are at issue here, warranty cost and bad debt reserves, and neither one of them were quite as high as we thought they would be. So that gave us a shot in the arm in the latter part of last year.

Joe Mondello – Sidoti & Co.

All right, thanks.

Operator

And with no further questions, I'd like to turn it back to our speakers for any remarks or closing statements. Please go ahead.

Norm Asbjornson

I'd like to thank all of you for joining us. We are very pleased to have had what we consider to be a very good first quarter, and we think we're going to have a very respectable second quarter, like I say it's not limited, not going to be limited by dollars of sales. It's going to have two things that are going to affect it. One, our ability to increase the volume by how many people we can hire and how much overtime we choose to work. And the other side of it, the bottom side of it being what cost increases we do or do not receive. But, other than that, there's not much question in our mind about the total dollars. It then comes down to the question in our mind about what costs are going to do to us. Looking longer range, as I said, if I read the paper and the news, television and all that, and guessed on that, I would be scared to death most of the time. If I look at the order desk and what I'm being told, I'm happy as can be. So take your pick.

Thank you. We'll talk to you again the end of the next quarter and talk to others of you in between. Thanks.

Operator

And that does conclude today's presentation. Thank you for your participation, and have a great day everyone.

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